IRC 179 Question (as modified by the TCJA)

18 Replies

I've been exploring the discussions addressing IRC 199A and the IRC 162 requirement that must be met in order to obtain the new tax benefit under 199A. During that process, I came across the item below which appears to assert that if IRC 162 is met then the following also may apply:

What Property Can Be Deducted Under Section 179

A business can use Section 179 to deduct tangible, long-term personal property. In the past, Section 179 could not be used to deduct personal property used in residential rental property. However, the Tax Cuts and Jobs Act eliminated this restriction starting in 2018. This means that landlords can now use Section 179 to deduct the cost of personal property items they purchase for use inside rental units—for example, kitchen appliances, carpets, drapes, or blinds. For example, if you spend $3,000 for a new stove and refrigerator for a rental unit, you may deduct the entire amount that year with Section 179.

Assuming I can meet the IRC 162 threshold, is this as straight forward as it appears for owner's of residential real estate rentals?

Originally posted by @Christopher Smith :

I've been exploring the discussions addressing IRC 199A and the IRC 162 requirement that must be met in order to obtain the new tax benefit under 199A. During that process, I came across the item below which appears to assert that if IRC 162 is met then the following also may apply:

What Property Can Be Deducted Under Section 179

A business can use Section 179 to deduct tangible, long-term personal property. In the past, Section 179 could not be used to deduct personal property used in residential rental property. However, the Tax Cuts and Jobs Act eliminated this restriction starting in 2018. This means that landlords can now use Section 179 to deduct the cost of personal property items they purchase for use inside rental units—for example, kitchen appliances, carpets, drapes, or blinds. For example, if you spend $3,000 for a new stove and refrigerator for a rental unit, you may deduct the entire amount that year with Section 179.

Assuming I can meet the IRC 162 threshold, is this as straight forward as it appears for owner's of residential real estate rentals?

Yeah, 

This one is little funky. You first need to meet an active trade or business for sec 179. So that is another whole discussions .

But in general, as rental generates loss or very minimum tax net income, sec 179 is limited to the net income from business. Thus most investor don’t qualify to take this.

You can achieve same deduction with 100% bonus depreciation that has no income limitations. 

Sometimes it’s better to take sec 179 if both bonus and 179 are available to get higher depreciation no.

Originally posted by @Ashish Acharya :
Originally posted by @Christopher Smith:

I've been exploring the discussions addressing IRC 199A and the IRC 162 requirement that must be met in order to obtain the new tax benefit under 199A. During that process, I came across the item below which appears to assert that if IRC 162 is met then the following also may apply:

What Property Can Be Deducted Under Section 179

A business can use Section 179 to deduct tangible, long-term personal property. In the past, Section 179 could not be used to deduct personal property used in residential rental property. However, the Tax Cuts and Jobs Act eliminated this restriction starting in 2018. This means that landlords can now use Section 179 to deduct the cost of personal property items they purchase for use inside rental units—for example, kitchen appliances, carpets, drapes, or blinds. For example, if you spend $3,000 for a new stove and refrigerator for a rental unit, you may deduct the entire amount that year with Section 179.

Assuming I can meet the IRC 162 threshold, is this as straight forward as it appears for owner's of residential real estate rentals?

Yeah, 

This one is little funky. You first need to meet an active trade or business for sec 179. So that is another whole discussions .

But in general, as rental generates loss or very minimum tax net income, sec 179 is limited to the net income from business. Thus most investor don’t qualify to take this.

You can achieve same deduction with 100% bonus depreciation that has no income limitations. 

Sometimes it’s better to take sec 179 if both bonus and 179 are available to get higher depreciation no.

Mine all generate substantial taxable income (also the reason I am interested in IRC 199A). I think I have a very good shot at IRC 162 trade or business status based upon the case law and my facts. I have two managers (one in state, one out) that are my agents under law and both manage multiple properties with continuous input, regular oversight and ultimate final decision making authority from me. 

Just wondering, if claiming a IRC 179 benefit is now fully permissible for rental properties (assuming they rise to the level of a trade or business) will claiming that particular benefit and claiming the IRC 199A benefit then raise my filing visibility?

Any thoughts anyone?

@Christopher Smith

Are you asking if this makes you a higher target candidate for an audit?

That's hard to say from the information provided as we don't know your whole financial picture. Generally speaking the IRS targets high income taxpayers as the big fish offer the highest potential "ROI" for the IRS auditors' time.

The question to you, respectfully, is "does it matter"?

If everything is done above board and per the Internal Revenue Code and Treasury Regs, isn't it your right to legally mitigate your tax burden?

Another big question is to what degree you should be using S179, taking into consideration IRC Sec 199A only applies to tax years 2018-2025 at the current moment.  Whether that be going all out on S179, partially using S179, or forgoing S179.  I'll leave that to you and your tax professional...

I literally saw a "Tax Professional" ask this in a Tax facebook group last week. 

PSA: make sure your tax pro doesn't get their education on facebook. 

As mentioned above accelerated depreciation applies to items with a life of less than 20 years. (Residential real estate as a whole, is 27.5)

So No, you can not now just expense a whole entire rental in 1 year. 

However- it expanded how/what we can expense all at once...which is why cost segregation (separating out some of the property from 27.5 year) is such a powerful tool. 

Originally posted by @Christopher Smith :

Mine all generate substantial taxable income (also the reason I am interested in IRC 199A). I think I have a very good shot at IRC 162 trade or business status based upon the case law and my facts. I have two managers (one in state, one out) that are my agents under law and both manage multiple properties with continuous input, regular oversight and ultimate final decision making authority from me. 

Just wondering, if claiming a IRC 179 benefit is now fully permissible for rental properties (assuming they rise to the level of a trade or business) will claiming that particular benefit and claiming the IRC 199A benefit then raise my filing visibility?

Any thoughts anyone?

199A is not straightforward when applied to Schedule E (rentals) as opposed to a regular Schedule C business. Will it create an audit flag? Possibly. Will the IRS have the resources to pursue it? Very doubtful. If you file as a separate business entity (a partnership or an S-corp), the audit risk is less.

179 is unlikely to create a red flag, in my opinion.

Originally posted by @Eamonn McElroy :

@Christopher Smith

Another big question is to what degree you should be using S179, taking into consideration IRC Sec 199A only applies to tax years 2018-2025 at the current moment.  Whether that be going all out on S179, partially using S179, or forgoing S179.  I'll leave that to you and your tax professional...

Valid point, which basically means: by taking a deduction now, you eat into your 199A 20% deduction. Why not wait until the 20% disappears in 2026 and use the deduction at that point? 

But what if 199A is extended? What if something else changes between now and then, either in tax law or in the taxpayer's business? Personally, I would not change any tax strategy based on the 2025 sunset of the tax reform, because it is not certain, and some say not even likely.

More broadly, long-term tax planning is a flimsy business. So many moving parts, so few crystal balls...

Why would you take section 179 on rental property assets when you could use 100% bonus depreciation and achieve the same thing? Use the 179 on the stuff that bonus depreciation doesn't apply to.

Originally posted by @Eamonn McElroy :

@Paul Caputo

It is dependent on location of the taxpayer, but generally speaking there is less federal-state decoupling with respect to S179 than bonus.

California does not respect bonus depreciation, but does respect 179 so no add back with the latter.

Originally posted by @Ashish Acharya :
Originally posted by @Christopher Smith:

I've been exploring the discussions addressing IRC 199A and the IRC 162 requirement that must be met in order to obtain the new tax benefit under 199A. During that process, I came across the item below which appears to assert that if IRC 162 is met then the following also may apply:

What Property Can Be Deducted Under Section 179

A business can use Section 179 to deduct tangible, long-term personal property. In the past, Section 179 could not be used to deduct personal property used in residential rental property. However, the Tax Cuts and Jobs Act eliminated this restriction starting in 2018. This means that landlords can now use Section 179 to deduct the cost of personal property items they purchase for use inside rental units—for example, kitchen appliances, carpets, drapes, or blinds. For example, if you spend $3,000 for a new stove and refrigerator for a rental unit, you may deduct the entire amount that year with Section 179.

Assuming I can meet the IRC 162 threshold, is this as straight forward as it appears for owner's of residential real estate rentals?

Yeah, 

This one is little funky. You first need to meet an active trade or business for sec 179. So that is another whole discussions .

But in general, as rental generates loss or very minimum tax net income, sec 179 is limited to the net income from business. Thus most investor don’t qualify to take this.

You can achieve same deduction with 100% bonus depreciation that has no income limitations. 

Sometimes it’s better to take sec 179 if both bonus and 179 are available to get higher depreciation no.

For 179 taxable net income limitation purposes (and assuming trade or business status is satisfied here), can I aggregate my rental property income across all properties. In other words, can I treat all my rental properties as part of a single trade or business for purposes of the 179 taxable net income limitation?

@Christopher Smith

All 'trade or business' income of the taxpayer is aggregated for purposes of determining the net income limitation of S179.

This means you could theoretically have a tax loss on your rentals, S179 the qualified improvement property (QIP), and have that S179 reduce your Schedule C income tax (but not self-employment tax), assuming you have net taxable income on the aggregation.

I've had plenty of these conversations lately and will have a few more in the next few days for year-end planning purposes.

Originally posted by @Eamonn McElroy :

@Christopher Smith

All 'trade or business' income of the taxpayer is aggregated for purposes of determining the net income limitation of S179.

This means you could theoretically have a tax loss on your rentals, S179 the qualified improvement property (QIP), and have that S179 reduce your Schedule C income tax (but not self-employment tax), assuming you have net taxable income on the aggregation.

I've had plenty of these conversations lately and will have a few more in the next few days for year-end planning purposes.

 Great, thanks